mREIT Funds Getting Whacked Again, Fed Worry Trade is Back

By Brendan Conway

It’s another weak session for mortgage REIT funds, which are suffering from fresh focus on the fact that, eventually, the Federal Reserve will need to take away the quantitative-easing punchbowl.

This latest round follows a weekend article authored by the Wall Street Journal‘s Jon Hilsenrath reviewing the Fed’s efforts to develop an exit strategy from its bond-buying programs:

Officials say they plan to reduce the amount of bonds they buy in careful and potentially halting steps, varying their purchases as their confidence about the job market and inflation evolves. The timing on when to start is still being debated. …

The Fed’s strategy on how to unwind the program has emerged as a source of some uncertainty in markets in the wake of its policy meeting earlier this month. The Fed said in its postmeeting statement that it was “prepared to increase or reduce the pace of its purchases” as the economic outlook evolved.

The suggestion that the Fed might boost its bond buying was a change in the policy statement that seemed to some an acknowledgment that more aid for the economy might be needed. Employment data in April were weak and inflation has fallen well below the Fed’s 2% inflation objective, both points that allow leeway for more stimulus. …

Charles Plosser, president of the Philadelphia Fed, said in an interview Friday that the change in the statement was meant “to remind everybody” that the Fed has “a dial that can move either way.”

The dial can also pause. Fed officials could shrink the size of their purchases and hold it at that level for a while as they assess the effects, or they could make several moves in a row if that seemed right. They could also boost their buying if they lose confidence about the economic outlook. The strategy is meant in part to ensure flexibility in an uncertain economy.

Yet while officials appear increasingly settled on a strategy for how to dial back the program, they haven’t decided when to start.

the iShares FTSE NAREIT Mortgage PLUS Capped Index Fund (REM) is down by 1.8%, with notable decliners including American Capital Agency Corp. (AGNC), off 3.3%, and Annaly Capital Management (NLY), down 2.1%. Market Vectors Mortgage REIT Income ETF (MORT) is down 1.8% and Two Harbors Investment (TWO) is down 2.4%.

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Chris Dieterich has covered the U.S. stock market for The Wall Street Journal and Dow Jones Newswires. He is a graduate of Regis University and the Missouri School of Journalism.